Gold investment as an inflationary hedge: cointegration evidence with allowance for endogenous structural breaks

Andrew C. Worthington · Mosayeb Pahlavani

235 citations0/0 files storedApplied Financial Economics Letters

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Market Dynamics and Volatility Monetary Policy and Economic Impact Financial Markets and Investment Strategies

Abstract

This note tests for the presence of a stable long-run relationship between the price of gold and inflation in the United States from 1945 to 2006 and from 1973 to 2006. Since both the gold market and the inflationary regime have been subjected to structural change over time, a novel unit root testing procedure is employed which allows for the timing of significant breaks to be estimated, rather than assumed exogenous. After taking these breaks into account, a modified cointegration approach provides strong evidence of a cointegrating relationship between gold and inflation in the post-war period and since the early 1970s. The results lend support to the widely held view that direct and indirect gold investment can serve as an effective inflationary hedge.

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References

1989The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis 1997Further evidence on breaking trend functions in macroeconomic variables 1992Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 2005Gold as a hedge against the dollar 1989Gold and Gold Stocks as Investments for Institutional Portfolios 1990Diversifying with Gold Stocks 1997Gold and commodity prices as leading indicators of inflation: Tests of long-run relationship and predictive performance 2000TESTING FOR THE COINTEGRATING RANK OF A VAR PROCESS WITH AN INTERCEPT

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